This presents a broad rethinking of a full range of current and future revenue models in light of insights drawn from my work on FairPay, including discussions with many businesses representing a full range of content/services, sizes, and stages, as well as leading-edge research in marketing and behavioral economics. It is relevant to investors, startups, and growing businesses - across for-profits, non-profits, and platforms/aggregators.

CONTENT:
Customer relationships and revenue models are critical to business success. This session explores the sea-change yet to come in the digital economy - how businesses now only dimly grasp where this is likely to go, and how to profit by moving in that direction.

Digital disruption is being shaped by two opposing forces that have yet to be reconciled:

For digital content and services, the invisible hand breaks down, resulting in conflict: consumers question the relationship between value and price, while providers struggle to impose artificial scarcity.

As a result, businesses struggle to find models that attract and retain enough profitable customers to sustain and grow their business.

This presentation provides new insight into harmonizing these opposing forces -- to sustainably mass-customize value propositions and set prices to maximize the mutual lifetime value of each customer relationship, for as many customers as can be satisfied. A wide range of common and emerging revenue models are considered as practical examples - with a focus on content subscriptions - drawing on recent findings in behavioral economics and game theory.

Despite his supposedly "Privacy-Focused Vision," it seems clear that Zuckerberg will not voluntarily go where he must. So we must force him to make needed changes in the core Facebook business model, one way or another. MORE

The seductive idea that we can enjoy free internet services -- if we just view ads and turn over our data -- has been recognized to be “the original sin” of the Internet. Requiring internet platforms to generate revenue from users could drive better corporate behavior. MORE

Current approaches to dynamic pricing are consumer-hostile. The author argues that there's a better way to build win-win relationships in the digital space that use cooperation, trust, and transparency to nurture customer lifetime value. MORE

Tuesday, February 26, 2019

Techonomy has just published my latest article on the insidious problems with the ad-based business model for dominant Internet platforms (notably Facebook and Google) -- with a surprisingly simple, proven, market-driven, regulatory method for fixing that.

Tuesday, February 12, 2019

“If you are not paying for it, you’re not the customer; you’re the product being sold.”

This compelling idea has been around for a long time because it resonates with many -- but it has been criticized as an oversimplification. A Slate article by Will Oremus, "Are You Really the Product?," provides an excellent critique.

The concerns Oremus addresses have validity and are important, but as a basis for management and regulation of dominant platforms (most notably Facebook and Google), this is a very useful simplification. Regulations of necessity are simplifications, but done properly, they simplify in ways that are useful and have limited downside.

It is true that being a paying customer does not assure that a businesses will be motivated to attend to the value you receive. Many fail badly in that regard, but the customer's power of the purse is a strong motivator, nonetheless. How much worse would these businesses be if there was no revenue driver?

The drive to "customer-value-first" business

Further, while we see many examples of businesses that are customer-hostile, our connected world is making it harder and harder for that to continue. We are moving to what I call the Relationship Economy, one that values Customer Lifetime Value and is becoming increasingly "customer-value-first," driven by "loyalty loops." Value-based pricing is increasingly recognized as best-practice in B2B, and it is bound to become more dominant in B2C as well.

Ownership of attention and data as labor

As Oremus points out, this criticism of the ad-model goes back to the TV era (not just to 1972, but to 1959, when Walter Lippman said of "free" TV, it is ultimately "the creature, the servant and indeed the prostitute of merchandising"). But, because the Internet is so personalized, it has taken a new and more ominous dimension. Personalized media exert precision power over our attention and data. Mass media "mind-control" was superficial -- easily recognized and counteracted. Manipulation and surveillance by precision media is insidiously more dangerous.

The "reverse meter" addresses this directly -- putting a value on user attention and data enables the user to judge and accept or reject the value proposition. That gives businesses a much stronger incentive to optimize data and attention for user value, and to be transparent about how that is done. We are no longer "powerless pawns," and gain real leverage -- whether enabled voluntarily by the platforms or by mandated by the government.

This will not solve everything. Other action is needed -- by users, and probably by regulators. As Oremus says, we "have the power to demand change." A forced shift to user revenue is not the only way to demand change. But it is the simplest and fastest way to drive a fundamental shift toward better directions. Other actions by users and regulators can then complement that. But there is reason to doubt they can be effective without it.

------------------------

More about FairPay

For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at FairPayZone.com). There is also a guide to More Details (including links to a video).

(FairPay is an open architecture, in the public domain. My work on FairPay is pro-bono. I offer free consultation to those interested in applying FairPay, and welcome questions.)

Here are brief comments on this excellent book, and highlights of what I would add. Many recognize the problem with the advertising-based business model, but few seem to be serious about finding creative ways to solve it. It is not yet proven that my suggestions will work quite as I envision, but the deeper need is to get people thinking about finding and testing more win-win solutions. His book makes a powerful case for why this is urgently needed.

McNamee's urgent call to action

McNamee offers the perspective of a powerful Facebook and industry insider. A prominent tech VC, he was an early investor and mentor to Zuckerberg -- the advisor who suggested that he not sell to Yahoo, and who introduced him to Sandberg. He was alarmed in early-mid 2016 by early evidence of manipulation affecting the UK and US elections, but found that Zuckerberg and Sandberg were unwilling to recognize and act on his concerns. As he became more concerned, he joined with others to raise awareness of this issue and work to bring about needed change.

He provides a rich summary of how we got here, most of the issues we now face, and the many prominent voices for remedial action. He addresses the business issues and the broader questions of governance, democracy, and public policy. He tells us: “A dystopian technology future overran our lives before we were ready.” (As also quoted in the sharply favorable NY Times review.)

It's the business model, stupid!

McNamee adds his authoritative voice to the many observers who have concluded that the business model that serves advertisers to enable consumers to obtain "free" services distorts incentives, causing businesses to optimize for advertisers, not for users:

Without a change in incentives, we should expect the platforms to introduce new technologies that enhance their already-pervasive surveillance capabilities...the financial incentives of advertising business models guarantee that persuasion will always be the default goal of every design."

He goes on to suggest:

The most effective path would be for users to force change. Users have leverage...

The second path is government intervention. Normally I would approach regulation with extreme reluctance, but the ongoing damage to democracy, public health, privacy, and competition justifies extraordinary measures. The first step would be to address the design and bushiness model failures that make internet platforms vulnerable to exploitation. ...Facebook and Google have failed at self-regulation.

My suggestions on the business model, and related regulatory action

This is where I have novel suggestions -- outlined on my FairPayZone blog, and communicated to McNamee last June -- that have not gotten wide attention, and are ignored in Zucked. These are at two levels.

The auto emissions regulatory strategy. This is a simple, proven regulatory approach for forcing Facebook (and similar platforms) to shift from advertising-based revenue to user-based revenue. That would fundamentally shift incentives from user manipulation to user value.

If
Facebook or other consumer platforms fail to move to do that voluntarily, this simple
regulatory strategy could force that -- in a market-driven way. The government could simply
mandate that X% of their revenue must come from their users -- with a
timetable for gradually increasing X. This is how auto
emissions mandates work -- don't mandate how to fix things, just
mandate a measurable result, and let the business figure out how best to achieve
that. Since reverse-metered ads (with a specific credit against user fees) would count as a form of reader revenue, that would provide an immediate incentive for Facebook to provide
such compensation -- and to begin developing other forms of user revenue. This strategy is outlined in Privacy AND Innovation ...NOT Oligopoly -- A Market
Solution to a Market Problem.

The deeper shift to user revenue models. Creative strategies can enable Facebook (and other businesses) to shift from advertising revenue to become substantially user-funded. Zuckerberg hasthrown up his hands at finding a better way: "I don’t think the ad model is going to go away, because I think fundamentally, it’s important to have a service like this that everyone in the world can use, and the only way to do that is to have it be very cheap or free."

Who Should Pay the Piper for Facebook? (& the rest), explains this new business model architecture -- with a focus on how it can be applied to let Facebook be "cheap or free" for those who get limited value and have limited ability to pay, but still be paid for, at fair levels for those who get more value and who are willing and able to pay for that. This architecture, called
FairPay, has gained recognition for operationalizing a solution that businesses can begin to apply now.

A reverse meter for ads and data. This FairPay architecture still allows for advertising to continue to defray the cost of service, but on a more selective, opt-in basis -- by applying a "reverse meter" that credits the value of user attention and data against each user's service fees -- at agreed upon terms and rates. That shifts the game from the advertiser being the customer of the platform, to to the advertiser being the customer of the user (facilitated by the platform). In that way advertising is carried only if done in a manner that is acceptable to the user. That aligns the incentives of the user, the advertiser, and the platform. Others have proposed similar directions, but I take it farther, in ways that Facebook could act on now.

This involves ways to mass-customize pricing of Facebook, to be "cheap or free" where appropriate, and to set customized fair prices for each user who obtain real value and can be enticed to pay for that. That is adaptive to individual usage and value-- and eliminates the risk of having to pay when the value actually obtained did not warrant that. That aligns incentives for transparency, trust, and co-creation of real value for each user. Behavioral economics has shown that people are willing to pay and will do so even voluntarily -- when they see good reason to help sustain the creation of value that they actually want and receive. We just need business models that understand and build on that.

Bottom line. Whatever the details, unless the Facebook shifts direction on its own to aggressively move in the direction of user payments -- which now seems unlikely -- regulatory pressure will be needed to force that (just as with auto emissions). A user revolt might force similar changes as well, but the problem is far too urgent to wait and see.

The broader call -- augmenting the wisdom of crowds

Shifting to a user-revenue-based business model will change incentives and drive significant progress to remedy many of the problems that McNamee and many others have raised. McNamee provides a wide-ranging overview of many of those problems and most of the initiatives that promise to help resolve them, but there, too, I offer suggestions that have not gained attention.

Most fundamental is the power of social media platforms to shape collective intelligence. Many have come to see that, while technology has great power to augment human intelligence, applied badly, it can have the opposite effect of making us more stupid. We need to steer hard for a more positive direction, now that we see how dangerous it is to take good results for granted, and how easily things can go bad. McNamee observes that "We...need to address these problems the old fashioned way, by talking to one another and finding common ground." Effective social media design can help us do that.

The core issue is one of trust and authority -- it is hard to get consistent agreement in any broad population on who should be trusted or taken as an authority, no matter what their established credentials or reputation. Who decides what is fake news? What I suggested is that this is the same problem that has been made manageable by getting smarter about the wisdom of crowds -- much as Google's PageRank algorithm beat out Yahoo and AltaVista at making search engines effective at finding content that is relevant and useful.

As explained further in that post, the essence of the method is to "rate the raters" -- and to weight those ratings accordingly. Working at Web scale, no rater's authority can be relied on without drawing on the judgement of the crowd. Furthermore, simple equal voting does not fully reflect the wisdom of the crowd -- there is deeper wisdom about those votes to be drawn from the crowd.

Some of the crowd are more equal than others. Deciding who is more equal, and whose vote should be weighted more heavily can be determined by how people rate the raters -- and how those raters are rated -- and so on. Those ratings are not universal, but depend on the context: the domain and the community -- and the current intent or task of the user. Each of us wants to see what is most relevant, useful, appealing, or eye-opening -- for us -- and perhaps with different balances at different times. Computer intelligence can distill those recursive, context-dependent ratings, to augment human wisdom.

A major complicating issue is that of biased assimilation. The perverse truth seems to be that "balanced information may actually inflame extreme views." This is all too clear in the mirror worlds of pro-Trump and anti-Trump factions and their media favorites like Fox, CNN, and MSNBC. Each side thinks the other is unhinged or even evil, and layers a vicious cycle of distrust around anything they say. It seems one of the few promising counters to this vicious cycle is what Cass Sunstein referred to as surprising validators: people one usually gives credence to, but who suggest one's view on a particular issue might be wrong. An example of a surprising validator was the "Confession of an Anti-GMO Activist." This item is readily identifiable as a "turncoat" opinion that might be influential for many, but smart algorithms can find similar items that are more subtle, and tied to less prominent people who may be known and respected by a particular user. There is an opportunity for electronic media services to exploit this insight that "what matters most may be not what is said, but who, exactly, is saying it."

If and when Facebook and other platforms really care about delivering value to their users (and our larger society), they will develop this kind of ability to augment the wisdom of the crowd. (Similar large-scale ranking technology is already proven in uses for advertising and Google search.) Our enlightened, democratic civilization will disintegrate or thrive, depending on whether they do that.

The facts of the facts. One important principle which I think McNamee misunderstands (as do many), is his critique that "To Facebook, facts are not absolute; they are a choice to be left initially to users and their friends but then magnified by algorithms to promote engagement." Yes, the problem is that the drive for engagement distorts our drive for the facts -- but the problem is not that "To Facebook, facts are not absolute." As I explain in The Tao of Fake News, facts are not absolute --we cannot rely on expert authorities to define absolute truth -- human knowledge emerges from an adaptive process of collective truth-seeking by successive approximation and the application of collective wisdom. It is always contingent on that, not absolute. That is how scholarship and science and democratic government work, that is what the psychology of cognition and knowledge demonstrates, and that is what effective social media can help all of us do better.

Other monopoly platform excesses - openness and interoperability

McNamee provides a good survey of many of the problems of monopoly (or oligopoly) power in the platforms, and some of the regulatory and antitrust remedies that are needed to restore the transparency, openness, and flexibility and market-driven incentives needed for healthy innovation. These include user ownership of their data and metadata, portability of the users' social graphs to promote competition, and audits and transparency of algorithms.

I have addressed similar issues, and go beyond McNamee's suggestions to emphasize the need for openness and interoperability of competing and complementary services -- see Architecting Our Platforms to Better Serve Us -- Augmenting and Modularizing the Algorithm. This draws on my early career experience watching antitrust regulatory actions relating to AT&T (in the Bell System days), IBM (in the mainframe era), and Microsoft (in the early Internet browser wars).

All are pointing in much the same direction. We all need to do what we can to focus the powers that be -- and the general population -- to understand and address this problem. The time to turn this rudderless ship around is dangerously short, and effective action to set a better direction and steer for it has barely begun. We have already sailed blithely into killer icebergs, and many more are ahead.

For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at FairPayZone.com). There is also a guide to More Details (including links to a video).

Thursday, January 3, 2019

My forecast for 2019: The best way to predict the future is to invent it -- let's work together on inventing a better 2020!

We face two over-arching and related challenges, one in the world of technology, and one in the larger world of enlightened democratic society.

At the broadest level, 2019 promises to be perhaps the worst and most traumatic year in recent American history. My point is not one of politics or policy (I bite my tongue), but of our basic processes of democratic society -- how we all work together to understand the world and make decisions. We now see all to well how much harm technology has done to that -- not by itself, but as an amplifier of the worst in us.

Within that world of technology, many have come to realize that we have taken a wrong turn in building vast and deeply influential infrastructures that are sustained by advertising. That perverts the profit incentive from creating value for we the people, to exploiting us to profit advertisers. That drive for engagement and targeting inherently conflicts with the creation of real value for users and society. We seem to not even be looking very hard for any solution beyond band-aids that barely alter 1) the perverse incentives of advertising, and 2) the failing zero-sum economics of artificial scarcity.

We seem to be at a loss for how to solve these problems at either level. I suggest that is simply a failure of will, imagination, and experimentation that we can all help rectify. Many prominent thought leaders have said much the same. I list some of them, and offer creative suggestions in An Open Letter to Influencers Concerned About Facebook and Other Platforms. I hope you will read it, as well as the related material it links to.

My suggestions are more specific, actionable, and practical. That letter summarizes and links to ideas I have been developing for many years, but have taken on new urgency. They are well-supported, but as yet unproven in their full form. I can't be sure that my solutions will work, but there seems to be growing consensus that the problems are real, even if few have suggested any actionable path to solving them. (I have been a successful inventor and futurist for many decades. I have often been wrong about details of my answers, but have rarely have been far wrong about problems and issues. Very smart and well-informed people think I am on the right track here.)

But whether or not I am right about the solutions, we all have to make it a priority try to find, test, and refine the best solutions we can to confront these critical problems.

Still, few in technology, business, or government have turned from business as usual to rise to the urgent challenges we now face -- and even those who alert us to these problems seem to have few concrete strategies for effective action.

Please consider the urgency and importance of these issues at both levels, see if my suggestions or those of others resonate -- and add your voice in those directions -- or work to suggest better directions.

If we do not begin to make real progress in 2019, we may face a very dark 2020 and beyond.

Tuesday, December 18, 2018

The reports of social media enabling disinformation, evading responsibility.*

The problem of motivated reasoning.*

Social media will not manage disinformation effectively until they no longer profit from it. We are trying to stop the tide of disinformation, when all we can do is limit its spread and impact. Tides cannot be stopped, but they can be managed -- if the managers are motivated to do so.

Follow the money. It is well established that

Social media are optimized for engagement, so they can sell ads.

Disinformation enhances engagement.

Therefore, social media profit from enabling disinformation to spread; they lose money by limiting harmful engagement.

The only systemic solution is to change their incentives: their salary (and stock value) must depend on revenue from users, not advertisers.

That may seem impractical, given where we are now, but there are powerful tools for changing that:

Monday, December 3, 2018

It is time to reverse the fundamental premise. Many now see that the long-popular model of free digital content (or other services) -- in exchange for advertising and personal data -- has become a Faustian bargain with the devil. It is bad for both users and their service providers. We are losing our souls to empty but addictive engagement -- and to destructive disinformation. Journalism is failing, music is reeling, video is struggling to find viable subscription models, and Facebook is poisoning our democracy.

The public barely took note when newspapers could no longer live off the fat of classified ads. Then "digital pennies" replaced "analog dollars" more widely, and, still, few cared. But now the devil has come for all of us. The increasing price of this deal with the devil has reached crisis levels. The recent PBS Frontline documentary, The Facebook Dilemma, reports in depth on how Facebook sold its soul and still seems to only barely realize it. Or, as the NY Times reports, maybe they do. Why should they care, when they are making billions?

The press and government may investigate, but what can anyone do? Governance, regulation, or breakup do not get to the root of the problem. What we have here is a business model problem. What we need is a business model solution. That is not as hard as it seems. And the problem goes far beyond Facebook. Most ad-supported business models suffer from mis-aligned incentives.

Getting to the heart of the problem ... and some alternative paths to a solution

In "A Blueprint For A Better Digital Society" (in HBR), Jaron Lanier and E. Glen Weyl provide a thorough analysis of why these ad-supported services have proven so harmful -- and offer their blueprint for a much better model.Here, I draw on that as background, to outline a simpler and more immediate path -- one that enables individual businesses act on their own to credit consumers for the value of their data. Starting there would shift incentives to better-enable the wider market in data that they propose.

Lanier and Weyl provide an excellent primer on the problem:

...the dominant model of targeted advertising derived from data surveillance and used to fund free-to-the-public services like social media and search is increasingly viewed as unsustainable and undesirable.

Today, internet giants finance contact between people by charging third parties who wish to influence those who are connecting. The result is an internet — and, indeed, a society — built on injected manipulation instead of consensual discourse. A system optimized for influencing unwitting people has flooded the digital world with perverse incentives that lead to violations of privacy, manipulated elections, personal anxiety, and social strife.

They set the stage for a proposed solution (emphasis added to points I will address) :

As we wait helplessly for more elections to be compromised, for more nasty social divisions to be enflamed, for more invasive data surveillance, and for more workers to become insecure, the widespread assumption that no other models are possible leads to a state of despair.

But there is an alternative: an emerging class of business models in which internet users are also the customers and the sellers. Data creators directly trade on the value of their data in an information-centric future economy. Direct buying and selling of information-based value between primary parties could replace the selling of surveillance and persuasion to third parties. Platforms would not shrivel in this economy; rather, they would thrive and grow dramatically, although their profit margins would likely fall as more value was returned to data creators. Most important, a market for data would restore dignity to data creators, who would become central to a dignified information economy.

These models have been discussed widely for years. Here, we describe a future based on them by exploring the business and societal structures that will be required to bring them to life. In the process, we will advocate for a more coherent marketplace. Without one, no corrective measure stands a chance.

...A coherent marketplace is a true market economy coupled with a diverse, open society online. People will be paid for their data and will pay for services that require data from others. Individuals’ attention will be guided by their self-defined interests rather than by manipulative platforms beholden to advertisers or other third parties. Platforms will receive higher-quality data with which to train their machine learning systems and thus will be able to earn greater revenue selling higher-quality services to businesses and individuals to boost their productivity. The quality of services will be judged and valued by users in a marketplace instead of by third parties who wish to influence users. An open market will become more aligned with an open society when the customer and the user are the same person.

They refer to this kind of "market economy for information" as providing "data dignity" and note some important challenges:

The foremost challenge in implementing data dignity is the yawning gap between big tech platforms and the individuals they harvest data from. If we asked big tech alone to make the change, it would fail: Too many conflicts of interest exist, and the inevitable concentration of power these platforms create is inimical to competitive markets and an open society.

For data dignity to work, we need an additional layer of organizations of intermediate size to bridge the gap. We call these organizations “mediators of individual data,” or MIDs. A MID is a group of volunteers with its own rules that represents its members in a wide range of ways. It will negotiate data royalties or wages, to bring the power of collective bargaining to the people who are the sources of valuable data. It will also promote standards and build a brand based on the unique quality and identity of the data producers they represent. MIDs will often perform routine accounting, legal, and payment duties but might also engage in training and coaching. They will help focus the scarce attention of their members in the interest of those members rather than for an ulterior motive, such as targeted advertising.

Boiling the ocean of two-sided markets -- Faust wins the world (for a time)

This vision of MIDs is a worthy one, and one I hope will succeed. But I suggest a path that traverses its way up this hill in a more indirect path might be more feasible. That still faces challenges, but they may be far more easily overcome.

Lanier and Weyl point out that MIDs are not a new concept, referring to pre-Internet examples. But I find a more concerning case in point to be the still-thought-provoking proposal for "infomediaries" in the 1999 book, Net Worth, by John Hagel and Marc Singer of McKinsey. That drew attention when published, but got little traction in practice. That history seems largely forgotten by those now proposing similar ideas. Their infomediaries seem to be much the same as Lanier and Weyl's MIDs.

I have been wondering for years why this vision did not come to be. I have seen no clear answer, other than that no one found a path to achieve the critical mass needed to establish such a multi-sided market for consumer data. MIDs face the same problem of critical mass.

Instead, the path taken was that the ad model proved wildly successful for Facebook and Google. That gave them the critical mass of users, and huge financial clout. That now makes it even more challenging to introduce infomediaries or MIDs -- whether by convincing the dominant platforms to enable that, or by competing with them.

The "reverse meter" as the essence of a market economy for information

FairPay suggests an alternative path toward a market economy for information -- one that may not go as far as infomediaries or MIDs, but which can be pursued unilaterally by individual businesses, in direct cooperation with their customers. That could set the stage for more customer-driven solutions.

Infomediaries and MIDs are, in essence, a way to create a "meter" for the value of data and attention:

Data and attention go from the consumer to the businesses that want to use it, and in exchange, funds go back to the consumer. That reverses the normal "metering" of service to the consumer, in exchange for funds to the business.

But we don't need infomediaries or MIDs to do that. A more basic kind of reverse meter can be applied by any paid Web service business to compensate users for their data and attention. That reverse meter offers direct benefit to those businesses and their customers.

The basic idea of the reverse meter is much like reverse metering of co-generated power when it is fed back to a power company's grid -- instead of paying the power company, the consumer gets paid. (Jeff Jarvis of CUNY School of Journalism suggested using reverse metering for online newspapers in 2011, when "metered paywalls" were a new thing.)

The first businesses to offer such reverse metering have not been in social media or search, but as the model is proven effective, it can motivate similar changes in those business sectors. The easiest place to start is in businesses that already charge users -- data/attention credits can simply offset fees for service, so no funds need be paid out directly. Thus services for news, music, video or social media that now charge users -- as alternative to showing them ads -- can offset those charges using a reverse meter that meters the value of attention they provide. (Some already do, as noted below.)

The beauty of the reverse meter, much as Lanier and Weyl explain, is to make for an exchange that benefits all parties of that exchange. The consumers gets credit for their attention and data (as quantified by the meter). The advertiser or data user gets value that they are willing to pay for. The service provider profits from operating this marketplace. This has great power because it aligns the incentives of all three parties:

Now the deal is obscured, arbitrary, and one-sided -- "We give you free service and you surrender whatever amount of your attention and data that we extract. We hope you will just accept that."

With a meter, the deal is quantified -- "For X units of attention or data we give you $Y of credit against the fee for our service. The meter will quantify that."

Reverse metering can be simple, done by any business

There are already many basic examples of reverse metering:

A number of services (such as Hulu, Spotify, USA Today) already offer a simple alternative to advertiser-supported "free" service: instead, opt for ad-free service with a paid subscription. That puts a specific value on advertising, and gives consumers a basic level of choice over whether to accept that value proposition.

Some ad-blockers offer similar options to control ads, and some publishers are participating.

One clever new service, Paytime, offers a kind of reverse metering that entirely decouples the advertising from the primary service (a bit like a very simplified infomediary or MID). Consumers with more time than money can watch video ads to get credit, to use to subscribe to Netflix, Spotify, or other services. Instead of interrupting the primary service experience, the consumer can watch the ads whenever they wish, and has some choice as to which ads they watch. Equivalent functionality could also be integrated directly into an individual service business.

[Update 12/20/18: The IAB (Interactive Advertising Bureau) has recognized forms of this as "Opt-in Value Exchange advertising...an honest transaction that provides value to the Advertiser, Publisher (developer), and the Consumer," and provides detailed guidance on why this is important. Here I suggest a broader context.]

Win-win-win for consumer, provider, and advertiser

Think about how even a simple reverse meter changes advertising. Now:

Consumers are annoyed by intrusive and annoying ads and abuse of their personal data.

Advertisers are frustrated that they cannot get their message through, even at high cost.

Publishers/service providers are caught in the middle, as ad rates fall, customers get angry and install ad blockers, and their business suffers on many fronts.

With a reverse meter, consumers are compensated for their attention and their data. Just having such a meter quantifies the value of data and attention, and implies a price for that value. So once it is metered, consumers will see that, and can judge if the price is right. If the price seems fair, they will accept the ads, if not, they will pay to avoid them. (FairPay provides advanced methods for setting this price for value from the consumer, as well as the price of metered value to the consumer, but even simple methods change the game.)

Once we begin to think in terms of metering the value of attention and data, we are able to get far more efficient in maximizing that value, even within a single service business:

For consumers, what is the value (or cost) of the ad to the user? Is the message relevant, timely, interesting, entertaining, useful? Or is it a just annoying. Is the delivery of that message intrusive? Can I enhance that by having some say in what messages I get, and when I get them?

For advertisers, what is the value of a more balanced relationship with the consumer? Am I getting my message to a good prospect, in a way that builds my brand? Can I build a relationship with the consumer, so that they help me craft just the right message? Can I get a direct response to my ad (including simple feedback, even if there is no purchase). Or am I turning off the people I want to reach, and wasting money on the wrong ones?

For publisher/service providers, how can I maximize that shared value so that I can earn a share for myself, and make my service more popular (to get more value share from more consumers)? Do my customers feel that the ads add value or subtract it?

Remember that advertising can be valuable when relevant and useful, or entertaining. Don't you get value from ads for products you want, or may want -- or those that make you feel good? There are many examples of valuable ads: just look at magazines for fashion, style, travel, sports, lifestyle, or hobbies. Some buy them mainly for the ads. Why do people like to watch and talk about Super Bowl ads? (some watch just for the ads). With simple reverse metering, service providers can provide a basic marketplace where their customers can interact with their advertisers to maximize value all around.

Economics and business models are all about aligning incentives. Metering data and attention enables everyone to manage incentives so they can all maximize value. That is the sustainable path to long term profit. Quietly addicting users to engagement, by spreading disinformation and sensationalized content, provides no real value -- it destroys it. Sooner or later, that model will self-destruct.

This is the age of "mass customization" and "one to one marketing," but we are not being creative about that. Zuckerberg admits the problem applies to Facebook, but sees no solution. He described his dilemma to the Times:

…having [Facebook] be free and have a business model that is ad-supported ends up being really important and aligned…Now, over time, might there be ways for people who can afford it to pay a different way? That’s certainly something we’ve thought about …But I don’t think the ad model is going to go away, because I think fundamentally, it’s important to have a service like this that everyone in the world can use, and the only way to do that is to have it be very cheap or free.

But the with the reverse meter, an array of variable options can be provided. A full ad load for free access, a full price for ad-free service, and a range of options in between.

FairPay expands on this idea of tracking value and giving consumers more choice about the value propositions they are offered. It provides an architecture for metering and setting a price on value in the individual context of each customer. An example that explores use of the reverse meter is Patron-izing Journalism -- Beyond Paywalls, Meters, and Membership.

Self-regulation, government mandate, or new market structures?

The big question is how we get from where we are to "a coherent marketplace" for data and attention:

Introducing infomediaries/MIDs has the problem of critical mass that is inherent in any two-sided marketplace.

Simple, company-specific reverse meters do not require a critical mass, only enough scale to justify building the reverse metering system. Very simple forms are already finding success in practice (as noted above). FairPay will take somewhat more effort to develop, but still can be within reach for many businesses (especially if supported by SaaS providers). That can begin to establish a more level market for data and attention. If the marketplace is level for all participants, including consumers, "data dignity" will be a natural by-product.

Facebook (and similar consumer platforms) could voluntarily begin to experiment with reverse metering now, starting with narrow trials, then learning, and expanding. Premium services could be offered to introduce the idea of consumer fees (offset by the reverse meter). As consumer revenue increased there would be less need for ad revenue. They could start simply, ins specific segments, and then expand and add the richer functions of FairPay. Change at the scale of Facebook might have to be gradual, but it is in their interest to start somewhere. This is explored further in Who Should Pay the Piper for Facebook? (& the rest).

If Facebook or other consumer platforms fail to act voluntarily, a simple regulatory strategy could force that -- in a market-driven way. Instead of mandating how to fix their business model, the government could simply mandate that X% of their revenue must come from their users -- with a timetable for gradually increasing X. This is much like how auto emissions mandates work -- don't mandate how to fix things, just mandate the result, and let the business figure out how best to achieve that. Since reverse metered ads would count as a form of reader revenue, that would provide an immediate incentive for Facebook to provide such compensation. This strategy is outlined in Privacy AND Innovation ...NOT Oligopoly -- A Market Solution to a Market Problem.)

All of the above partial steps would create a market for data that infomediaries/MIDs could compete in. By introducing reverse metering for the value of attention to ads and release of personal data, we would begin to establish a market value for it. Once that value is established, then we have a clear motivation to look to infomediaries or MIDs -- if they can exchange that value more efficiently.

If we already have SaaS services that operate reverse meters for multiple consumer service businesses, such SaaS services could, themselves, expand to add infomediary/MIDs functionality. That provides a natural path for evolving into a multi-sided marketplace for all of the consumers and businesses (service providers and advertisers) that they serve.

FairPay is agnostic as to whether that market is directly between businesses and consumers, or includes MIDs.But FairPay explicitlyputs the value of attention and data into the overall value proposition.Consumers will be able judge to what degree a business compensates fairly for their attention and data, and decide whether they are satisfied with that.If so, fine -- they can work with them directly.If not, then they will be motivated to use an infomediary or MID.In that way a “coherent market” (or at least a more level one) can come first, and so provide fertile ground for the emergence of MIDs.

*On that final point I think Lanier and Weyl may understate the business profit value of their proposal. They say (emphasis added):

Platforms would not shrivel in this economy; rather, they would thrive and grow dramatically, although their profit margins would likely fall as more value was returned to data creators.

I submit that the economic value of advertising can be increased significantly by being better targeted and better received, and using more productive and appealing formats -- all driven by aligned market incentives. That might well increase platform profit margins, since advertisers will be justified in spending more than they do now. And as Lanier and Weyl hint at, but do not emphasize, even at lower unit margins, more customers can mean higher total profit margin.

---More on this theme from Lanier and Weyl

Those authors have collaborated with others in other important works that explore the transformative potential of the economics of reverse metering.

Weyl is coauthor of the book, Radical Markets: Uprooting Capitalism and Democracy for a Just Society, which includes a chapter on "Data as Labor" in that broader context. One passage: "Rather than feeling like passive consumers of Internet services, user might see themselves as active producers and participants in the creation of value." In this blog, I refer in many places to that central idea, the "co-creation" of value.

Tuesday, November 13, 2018

This was initially published as"The Case Against Micropayments" -- From Fear and Surprise to The Comfy Chair

Both subscriptions and micropayments, as currently applied, are far too inflexible to satisfy more than a small fraction of potential paying customers. What is needed is a more flexible strategy that blends elements of both in a way that minimizes risk to the customer -- whether they access, and enjoy more or less than they expect in any given period. This more descriptive title reflects that core message. [2/1/19]

Part 1: Micropayments(Followed by Part 2: Subscriptions and a unifying perspective)

Micropayment hope springs eternal. Clay Shirky and Andrew Odlyzko drove a stake in its heart way back in the dot-com era, but here it is again -- with new, more frictionless payment solutions and new content aggregators, some counting on the magic of blockchain and cryptocurrencies. Some micropayment content services have gained limited traction, primarily in Europe. But as Shirky said, "their weakness is systemic." Decades later, these systemic problems remain unsolved.

But that is true of micropayments as currently conceived: small payments at pre-defined rates. When the rates at which micropayments are charged become more reflective of the dynamics and behavioral economics of actual value -- as received and perceived by the customer -- that systemic problem can be solved. How can that be?

The problem as we now conceive it

Shirky summarizes the systemic problem:

The Short Answer for Why Micropayments Fail

Users hate them.

The Long Answer for Why Micropayments Fail

Why does it matter that users hate micropayments? Because users are the ones with the money, and micropayments do not take user preferences into account.

In particular, users want predictable and simple pricing. Micropayments, meanwhile, waste the users' mental effort in order to conserve cheap resources, by creating many tiny, unpredictable transactions. Micropayments thus create in the mind of the user both anxiety and confusion, characteristics that users have not heretofore been known to actively seek out

Odlyzko pinpoints the behavioral problem, drawing on the century old history of micropayments, and quoting Kara Swisher:

What was the biggest complaint of AOL users? ...Their overwhelming gripe: the ticking clock. Users didn’t want to pay by the hour anymore. ... Case had heard from one AOL member who insisted that she was being cheated by AOL’s hourly rate pricing. When he checked her average monthly usage, he found that she would be paying AOL more under the flat-rate price of $19.95. When Case informed the user of that fact, her reaction was immediate. ‘I don’t care, I am being cheated by you.’

Odlyzko's conclusion: "The lesson of behavioral economics is thus that small payments are to be avoided, since consumers are likely to pay more for flat-rate plans/"

Now it is not so much the "ticking clock," as "the ticking meter," but the problem remains. Much like Monty Python's Spanish Inquisition: "surprise and fear." Fear that we may be surprised to have run up a large bill without realizing it. It may be only a little regrettable, or it may be very seriously regrettable. We will be stuck with that (or try to plead with the Inquisition's customer service department for forgiveness).

Even if you make the micropayment process totally frictionless, surprise and fear remain.

The pricing theory of relativity -- removing surprise and fear

We think of micropayments as immutable quanta of price. So many cents or micro-tokens for so many units of service. But why are we stuck with such Newtonian pricing, when Einstein showed us that clocks and meters can expand or contract relativistically?

We forget that prices need not be pre-set, but can be dynamic, and that they should adapt to whatever the customer and the business agree is fair. Prices should be relative to value, as I said above: reflective of the dynamics and behavioral economics of actual value -- as received and perceived by the customer.

The most systemic solution to the problem with micropayments is to apply post-pricing, in the form of post-bundling. We are talking about micropayments for digital "experience goods," which are unlike traditional "goods:"

They have little marginal cost.

Their value is not really known until after the experience.

They are typically bundled such that the mix of items and amount to be metered is not known until the entire bundle is chosen by the customer, on demand, during the course of a billing period.

Why should such services be metered and priced at a pre-set rate? That is antiquated thinking:

The vendor can afford to take on most of the pricing risk (since the marginal cost of service is negligible).

The unit price should be discounted to provide quantity discounts (and to adjust for items sampled but not finished).

Price caps can be applied to ensure reduce surprise and fear. Such a cap might be higher than the corresponding rate for a simple flat-rate subscription, to compensate for the expectation that the customer will often pay less than the cap or even the usual flat-rate, but still low enough to eliminate the customer's fear.

I have written about simple forms of doing this:

How Blendle Could Do Much Better with FairPay explores the example of Blendle, one of the more prominent uses of micropayments for news (which had some success in Europe, but now seems to be stalled in the US). (I comment on Blendle's "instant refund" feature as one valuable step toward reducing fear a bit, one that even Clay Shirky was impressed by, but I suggest it is too binary.)

The core idea is that micropayments are most relevant to recurring business relationships, whether with a single content/service provider, or with an aggregator of such content/services. In either case we need to look beyond individual transactions to the aggregate value transfer over a period, in the context of the ongoing relationship. Subscription businesses already recognize that Customer Lifetime Value (CLV) is their primary success factor.

Advanced forms of FairPay take this farther, eliminating fear by allowing the customer to pay no more than they think fair for any given billing period -- as long as they do not abuse that privilege. That is just another level at which to leverage the "free" replication of digital content/services to eliminate the customer's pricing risk.

Whatever degree we take it to, when we shift to this relationship view, we realize that the vendor can absorb most of the short-term pricing risk, as long as the overall relationship is profitable over the lifetime of the customer. They can use the meter as just a guide, applying it to get a price that is adaptive to the nature of the relationship. The business can track each customer's fairness reputation over time, and use that to decide how much pricing power to grant and when. That enables prices to be set in a way that eliminates the customer's fear of nasty surprise. If we can remove that "anxiety and confusion," users' hatred of micropayments will turn to love. Good relationships build and thrive on comfort -- give customers the comfy chair!

Part 2: Subscriptions and a unifying perspective"Subscription hell" -- the case against flat-rate subscriptions

Interestingly enough, the critics of micropayments argue that the success of flat-rate subscriptions dooms micropayments, but now it is becoming apparent that the success of subscriptions is self-limiting. So many services are turning to flat-rate subscriptions that consumers are facing what Danny Crichton called "Subscription Hell."

Another week, another paywall. ...I’m an emphatic champion of subscription models, particularly in media. Subscriptions align incentives in a way that advertising can never do, while also avoiding the morass of privacy and ethics that plague ad targeting. ...Incentive alignment is one thing, and my wallet is another. All of these subscriptions are starting to add up. ...Worse, subscriptions aren’t getting any cheaper. ...I’m frustrated with this hell. ...And I’m frustrated that subscription pricing rarely seems to account for other subscriptions I have, even when content libraries are similar.

...For product marketers, the default mentality is to extract a lot of value from the 1% of readers or users that are going to convert to paid. Subscriptions are always positioned as all-or-nothing, with limited metering or tiering, to try to force the conversion. To my mind though, the question is not how to get 1% of readers to pay an exorbitant price, but how to get say 20% of your readers to pay you a cheaper price. It’s not about exclusion, but about participation.

...Subscription hell is real, but that doesn’t mean the business model is flawed. Rather, we need to completely transform our thinking around these models, including the marketing behind them and the features that they offer. We also need to consider consumers and their wallets more holistically, since no one buys a subscription in a vacuum. For too long, paywall playbooks have just been copied rather than innovated upon. It’s time for product leaders to step up and build a better future.

With a broader relationship view, we see that the apparent dichotomy between flat-rate subscriptions and discrete "pay per view" micropayments is an artifact of our narrow, transaction-level thinking.

We think of micropayment transactions as isolated quanta that add up in ways that cause "anxiety and confusion" because we do not think about how the metered units map to actual value.

We think of flat-rate subscriptions from the isolated perspective of a single provider, because our vendors do not think about the whole customer, and what other subscriptions make competing demands for "share of wallet."

But if we look past those blinders, we see that we exchange variable levels of value, and each should draw a fair share from the consumer's painfully finite wallet. To solve the systemic problems of payments that sustain the creation of digital services -- whether micropayments or subscriptions -- we must take a systemic view of value, share of wallet, and pricing risk. That is why my book has the subtitle "Adaptively Win-Win Customer Relationships."

Most of us can have nearly all of the content and services we want, at a fair and affordable price -- if businesses get smarter about sustainably exploiting the nature of digital services in a cooperative relationship context. Total removal of surprise and fear from pricing is inefficient and impractical, and benefits few. Even with flat rate, we have the converse fear that we will not get our money's worth in any given month. But businesses can leverage digital abundance (that costs them nothing) to put limits on the fear. They can seek to put each of their customers into a comfy chair that is cooperatively and adaptively designed to fit them just right. Failing to do that will be a tragic waste, for businesses and consumers alike.

For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at FairPayZone.com). There is also a guide to More Details (including links to a video).

Peter Drucker:

"The greatest danger in times of turbulence is not the turbulence, it is to act with yesterday's logic."

How FairPay Works
...over a relationship, as a repeated game
...through a
deceptively simple
balancing dynamic:

1. Set the rules
(Seller). As usual, the seller sets the ground-rules of
the game, but in this repeated game, the rules favor fairness,
transparency, and cooperation on both sides. The seller decides to
whom to make a FairPay offer, on what terms and conditions. FairPay
offers are a privilege that can be granted or withheld.

2. Set the price (Buyer).
Reversing traditional practice, the buyer is granted the power to
set the price to whatever value-based price the buyer considers fair
-- after the sale, when the real value is experienced and known.

3. Repeat the game? (Seller).
This seller power is what makes FairPay work, balancing the power of
the buyer to set the price. The seller tracks the price, and
determines, in the context of the overall history, whether it seems
fair enough to the seller to continue the FairPay game for another
round.

The buyer knows this is a repeated game, and must consider the
consequences when exercising his price-setting power. That motivates
the buyer to price reasonably fairly. This builds a relationship
based on fair value exchange, that adapts and evolves over time.
The seller manages "dialogs about value" that frame the value that was delivered, and a suggested price for that
-- and nudge the buyer to be generous by offering more value for
more generosity.

This
repeated game structure gives buyers a strong incentive to price fairly – and enables
sellers to limit their future exposure to those who do not.

More broadly, it shifts the
entire focus of customer relationships from short-term transaction price to
long-term relationship value.

Limit your
risk from those trial offers by tracking the results
(fairness) for
each buyer, and limiting future offers if you judge that buyer
to not pay fairly

Retain set-price plans for those who refuse
to play the game fairly

Learn how much freedom (FairPay credit) to
extend (or what restrictions to enforce) to get satisfactory
results from each customer segment

Continue to make
every offer a trial...
...as long as each buyer continues paying fairly--in your
judgment

Delight your
customers: give them what they really want, at a price they
really think fair.
Shift the conversation from price to
value, and from transactions to relationships.
Empowerthem to engage with you and tell you what they
value.Make commerce a repeated game that drives value creation to build
a profitable relationship with high Customer Lifetime Value (CLV).

...This
sample offer letter
to consumers shows how a newspaper might frame FairPay as a privileged
benefit to regular patrons – to enable
them to participate in a win-win pricing process and personalize their value
propositions – as an
alternative to a standard freemium "soft paywall."

About Me

President and founder of Teleshuttle, I have decades of experience innovating in digital media industries. I have managed and consulted for corporations of all sizes, developed a variety of pioneering online services, and hold over 50 patents now licensed by over 200 companies to serve billions of users. I generally develop my work through Teleshuttle Corporation, in collaboration with partner companies.
My work on FairPay is now being pursued as a pro-bono project aimed at fostering testing, refinement, and wide adoption. My book on FairPay was published in 2016 by Business Expert Press. (More at http://bit.ly/RRFPbio.)

Contact

Reisman is working on FairPay on a pro-bono basis, welcomes inquiries about it, and offers free consultation to those interested in evaluating and applying it. Please email to fairpay [at] teleshuttle [dot] com.